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If Katie Holmes Has A Problem With Scientology - So Did IRS Until 1993

Pedestrians walk past the Church of Scientology along Sunset Boulevard in Hollywood, California on July 9, 2012. US actor Tom Cruise and Katie Holmes have reached a 'private' divorce settlement less than two weeks after she announced their bombshell split, as the Hollywood pair issued a joint statement pledging to act in the 'best interests' of their six-year-old daughter Suri, and to respect each other's 'beliefs' in her upbringing, in an apparent reference to Scientology. Speculation over the cause of the split has focused on Holmes' reported concern that Cruise wanted their daughter to be immersed more deeply in the Church of Scientology, of which he is a prominent member. (Image credit: AFP/Getty Images via @daylife)

The Tom Cruise – Katie Holmes divorce has brought Scientology back into the news. It created a little puzzle for me. I constantly run into references to Scientology cases when reading tax decisions, but I could not recall actually reading any of them. I hate when that happens. The answer to the puzzle turned out to be pretty simple. There was a thirty years war between Scientology and the IRS. The war ended in 1993 with Scientology related organizations being recognized (or rerecognized ) as churches. The final resolution was not a model of transparency . Although not officially acknowledged by the Service, the confidential closing agreement between the Service and the Church was leaked. If this purported text of the agreement is a fabrication, it was masterfully done. The closing agreement appears to be similar in length to the Treaty of Westphalia, which ended the actual ThirtyYears War (1618-1648).

The earliest Scientology cases were the ones where the church originally lost its exempt status. It turned on the issue of inurement. Rather than being a church, the Service contended, successfully, that it was acting more like L. Ron Hubbard, Inc. Those cases had some interesting stuff:

During the 1960′s, Scientology organizations around the world were required to pay directly to L. Ron Hubbard, ten percent of their income. These payments were termed “debt repayments” because they were designed to compensate Hubbard for his work in originating the Scientology religion. The Tax Court concluded that during 1971-1972 the Church continued to make debt repayments to Hubbard.

During the years in question, the new directors performed only one function. In the summer of 1972, they approved L. Ron Hubbard’s decision to transfer approximately two million dollars from an OTC bank account in Switzerland to the Apollo. The money was stored in a locked file cabinet to which Mary Sue Hubbard had the only set of keys.

The rest of the twenty odd decided cases, which may represent a small sample of thousands of lawsuits, were mainly skirmishes in the war between Scientology and the Service. Church entities were resisting summons and the IRS was resisting FOIA requests. Critics of the closing agreement seem to think that the Service crumbled, which was inexcusable, since the Service was mostly winning in court. There was one case, most critical to Scientology, to which it was not technically a party. The case of Robert Hernandez went all the way to the Supreme Court. In 1987, the Supreme Court ruled that “fixed donations” that Mr. Hernandez made in exchange for “auditing” sessions, while attached to the “E-meter”, were quid-pro-quo and hence not deductible.

There is criticism of the Service for giving away the store that it won in Hernandez, in the closing agreement:

The Service acknowledges its obligation to interpret and apply the “gift or contribution” requirement of Code section 170(c) equally and consistently to the fundraising practices of all religious organizations that receive fixed donations from parishioners in connection with participation in worship and similar religious rituals or services.

Presumably this would put the auditing session, which are the Scientology equivalent of a sacrament, in the same category as “pew rents” which Revenue Ruling 70-47 holds to be deductible as contributions.

The closing agreement came up in litigation in 2002. Michael Sklar was arguing that the Service should be bound to apply its principles more generally to allow the deduction of at least some of the tution to an Orthodox Jewish day school. The Ninth Circuit chided the Service for not releasing the closing agreement and punished it by assuming for purposes of the its decision that it said what Mr. Sklar said it did. That was not all that helpful to Mr. Sklar, though:

We seriously doubt that the Sklars are similarly situated to the persons who benefit from the Scientology closing agreement because the religious education of the Sklars’ children does not appear to be similar to the “auditing”, “training” or other “qualified religious services” conducted by the Church of Scientology. Second, even if they were so situated, because the treatment they seek is of questionable statutory and constitutional validity under 170 of the IRC, under Lemon, and under Hernandez, we would not hold that the unlawful policy set forth in the closing agreement must be extended to all religious organizations

Myself, I think the IRS “treaty” with Scientology seems to make a lot of sense. The churches were required to put controls in place that probably make them more compliant than most churches, unless they have eroded over time. To the credit of the Service and the courts, it was never about the specific beliefs, but always about the inurement issues, which tend to be applied pretty even handedly. I would love to hear what my friends from the Freedom From Religion Foundation think and also of course the thoughts of Robert Baty, bane of the basketball ministers. Watch the comments section.

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In reading that article I was reminded of that 500 acre Eden/Compound that the Scientologists were reported to have and which Katie was reportedly trying to keep her child out of.

Maybe it is appropriate to have a tax-exempt church of Scientology, but I think such “churches” should be closely scrutinized in order to try and insure that their exemptions don’t extend beyond the letter and the intent of the law.

I just thought of something else.

I just recently learned that the Mormons have an organization know as “MormonVoices” (website: http://mormonvoices.org/ ) that makes it their business to send out their agents to try and counter bad press.

Sounds so very much like the stories you hear about what Scientologists do.

This cult needs to be investigated by the IRS and the FBI for abuse, fraud and crime. Over 6,000 peopled signed a White House petition to have them investigated, due to hush money the investigation was refused, take a look:

Thanks for pointing that out. I actually had read that decision. Then when I went back in to confirm the date, I found the 2002 decision and thought I was confused, which happens. 2008 pretty well reiterated 2002. Have to admire the Sklars for persistence. They should have moved before they tried it again. I understand that the 9th Circuit is a little extreme on church/state issues. When someone was there fighting about the details of the parsonage exclusion, they asked both sides to start briefing whether their should be a parsonage exclusion. The law was modified, which mooted the case (I may be screwing up the legal lingo here, I am just a CPA).

Oh, and as for inurement issues, the current leader of Scientology lives a luxury lifestyle, with several residences, cars, plane, suite on a cruise ship, and countless other perks, all on a salary last reported in the $45k range.

Indeed, it would be interesting to find out to what extent the Scientologists are “ordaining” its employees throughout its operations so that they can exclude all or part of their income as “ministerial housing”.

How many “basketball ministers” and similar sorts do the various Scientology businesses/organizations employ?